A company made certain investments in the form of shares of another company, jointly promoted as long term strategic investment in two stages. In the first stage, the company received shares through direct allotment by the investee company at par. In the second stage, the company acquired further shares in the investee company at a discount from the other promoter of the investee company. Long term investment was carried out at actual cost in books of accounts. One specific part of the above investment was sold for more than its acquisition cost and company hereby recorded profit.
The company has sought the opinion on the following issues arising from the above:
(a) Whether the long-term investments were to be carried at their actual cost or at the average cost of the two lots of investment.
(b) Whether the auditor’s contention was justified to qualify the report stating that the investments were carried at a higher value in books of accounts
On the basis of the above, the opinion in respect of the issues raised by the company:
(a) The correct accounting treatment as per AS 13 of the transaction would be to determine the carrying amount of the portion of investment sold, on the basis of average cost of the two lots of the investment. Accordingly, as per the facts supplied, a loss should be booked on the sale of the part of the investment and the carrying amount of the remaining investment should be reduced to the average cost.
(b) The auditor’s were justified in their stand that despite the fact that the investment was held in two specified lots acquired at different costs, upon sale of one specified lot, the balance investment should be carried at average cost and not the actual cost.
(c) The auditor’s were justified in qualifying their report on the grounds that investments were not carried at the average cost.
On the basis of the above, the company should determine the carrying amount of long-term investments at average cost of the two lots of investments.
The above opinion was affirmed by the ICAI-Expert Advisory Committee.
